Credit Reform and My New 703.8% Card

Consumer reporters were all crowing about a 79.99% rate credit card that was launched in response to credit reform a few months ago--collectively horrified that a law designed to cut rates and eliminate sneaky fees was inspiring increasingly abusive bank behavior.

I thought that was about as bad as it gets until I took a close look at the statement for my new Macy's card, which I had opened with "instant credit" while Christmas shopping. It made that 79% card look like a bargain.

Department Stores National Bank, which issues the card, charges a "minimum interest charge." On my average daily balance of $3.41, that minimum charge worked out to "an actual annual percentage rate" of 703.80%. (Part of the impact of last year's credit reform is that the issuer had to disclose that shocker on the statement, while also noting that the card's normal APR is 24.5%.)

Such are sneaky new fees that are now springing up in response to the Credit Card Accountability, Responsibility and Disclosure Act passed last May, said Bill Hardekopf, president of LowCards.com, a rate-shopping web site.

"We are going to see a lot of creative new charges, especially in the area of fees," he predicted. "The CARD Act tied issuers hands in some areas, but they are going to be looking for all sorts of creative new ways to make up the revenue that they lost.

The main provisions of the CARD Act kick in on Feb. 22 and they will eliminate some bad practices, making it tougher for banks to raise rates retroactively or send their bills so late that the bank almost forces customers to pay late and trigger late fees, for example. (A full analysis of what new rules are already in effect and what's next was published at the charming blog Get Rich Slowly recently. You can see the full analysis here.)

However, banks already responded to the changes by shifting to variable-rate cards, raising rates and restricting consumer credit limits. More changes are on the horizon, experts predict. This Macy's card may be a harbinger of what's to come.

I couldn't raise anyone at Department Stores National Bank, but called Citibank, which was listed as their parent company on a regulatory web site. Sam Wang, a Citi spokesman, confirmed that Citi owns Department Stores National.

He also confirmed that the bank has a "minimum finance charge" amounting to $2 in any month that you have a balance. (This minimum finance charge used to be $1, but they doubled it last year.) As a result, those who have a relatively low balance--anything under, say, $500, will find that this fee is going to boost your effective annual interest rate well over 100% for that month. Credit reform demands that they disclose your astounding "actual" APR on the statement, Wang acknowledged.

It's only the people who are goofy enough to charge up a storm that pay the advertised 24.5%.

The good news: It says on the bill that if you pay the full balance on time, they'll refund the finance charge on your next statement.

The moral of this story: In today's world, credit cards should be used for convenience, not credit. It's fine to swipe the card. But only if you can pay off the balance each month. Use the card for a purchase that you can't afford and you'll pay dearly.

Anyone else have a story to share about what's happened to their cards under credit reform? Tell us about it here. I'd love your feedback.